A California federal court has given employers a New Year’s gift, issuing a temporary restraining order preventing Assembly Bill 51—the law barring employers from requiring employees to enter into agreements to arbitrate FEHA and California Labor Code claims—from going into effect. The order will remain in place until the court rules on the pending motion for a preliminary injunction, which is set to be heard on January 10, 2020.

Background on AB 51

On October 10, 2019, Governor Gavin Newsom signed into law Assembly Bill 51 (AB 51). When (or if) it takes effect, AB 51 will prohibit employers from entering into new agreements—or extending previous ones—that require employees or applicants to arbitrate claims arising under the California Labor Code or the California Fair Employment and Housing Act (FEHA). Specifically, AB 51 will amend the Labor Code to provide, “A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the” FEHA or Labor Code.[1] These rights, forums, and procedures include “the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.”[2]

AB 51 also bars opt-out provisions, a common way to provide a choice of whether to enter into an arbitration agreement, stating that any “agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights” is deemed to impose “a condition of employment.”[3] Noncompliance with AB 51 is itself an unlawful labor practice and can be punishable as a crime.[4]

AB 51 includes a few exceptions. As discussed further below, it is not “intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.”[5] In addition, it applies only prospectively to agreements “entered into, modified, or extended” after the law’s effective date (January 1, 2020).[6]

Governor Brown Twice Vetoed Similar Legislation Because It Is Preempted by the FAA

AB 51 is at least the third attempt by the California legislature to bar arbitration agreements in the employment context. Former Governor Jerry Brown twice vetoed similar bills. In 2015, Governor Brown vetoed AB 465, reasoning in part that “a blanket ban on mandatory arbitration agreements is a far-reaching approach that has been consistently struck down in other states as violating the Federal Arbitration Act.”

Three years later, the legislature passed a substantially similar bill, AB 3080, which Governor Brown again vetoed because it “plainly violate[d] federal law.” He explained that “[t]he direction from the Supreme Court since my earlier veto has been clear – states must follow the Federal Arbitration Act and the Supreme Court’s interpretation of the Act.” “By its terms, . . . the Act cares not only about the ‘enforce[ment]’ of arbitration agreements, but also about their initial ‘valid[ity]’—that is, about what it takes to enter into them. Or said otherwise: A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made.”

Pending Legal Challenge to AB 51

As widely anticipated, the U.S. Chamber of Commerce, the California Chamber of Commerce, the National Retail Federation, and other organizations filed a Complaint for Declaratory and Injunctive Relief in federal court challenging the statute.[7] Preemption is the gravamen of the complaint: “AB 51’s limits on arbitration agreements conflict with federal law. Those limits are therefore preempted and invalid under the Supremacy Clause of the Constitution of the United States.”[8] Plaintiffs rely on the legislative analysis and the provisions of AB 51 itself in alleging that AB 51 “is specifically targeted to preclude the use of arbitration agreements as a condition of employment” in violation of the FAA.[9] Plaintiffs further allege that the attempted carve out for agreements otherwise enforceable under the FAA does not avoid this result because the U.S. Supreme Court has confirmed that the FAA bars state laws that create a barrier to entering into arbitration agreements.[10]

Plaintiffs ask that the court: a) declare AB 51 preempted by the FAA; and b) preliminarily and permanently enjoin the California AG and other state officials from enforcing AB 51 for arbitration agreements governed by the FAA.

The Motion for a Temporary Restraining Order

On December 16, 2019, the plaintiffs moved for a temporary restraining order (TRO) to delay enforcement of the new law while the parties litigate plaintiffs’ motion for preliminary injunction.[11] In support of their request, plaintiffs argued that:

(1) they are likely to succeed on the merits: “[t]he preemption question is not a close call” because “the Supreme Court has repeatedly held that state laws disfavoring arbitration agreements are preempted”;

(2) businesses face irreparable harm if the law goes into effect, either because they will have to forego their federal protected rights to enter into arbitration agreements with employees if they comply with AB51 or because they face potential enforcement actions if they do not comply; and

(3) the balance of hardships and public interest “strongly support” issuance of the requested TRO.[12]

The defendants countered that “AB 51 does not run afoul of . . . the FAA.”[13] Because AB 51 applies to all forms of alternative dispute resolution, the defendants contend, it does not discriminate against arbitration. They further argue that AB 51 will prohibit only unilateral, employer-imposed arbitration provisions; it “does not prevent parties from entering into arbitration agreements voluntarily.”[14] According to defendants, AB 51 is consistent with the FAA principle that arbitration “is a matter of consent, not coercion.”[15]

Absent preemption, defendants argue, there is no irreparable harm, and plaintiffs cannot show that the balance of hardships weights in their favor.

On December 30, 2019, Judge Kimberly J. Mueller issued an order granting the TRO, enjoining the state from enforcing AB 51 pending resolution of the pending motion for preliminary injunction.[16] The court found that plaintiffs “raised serious questions regarding whether the challenged statute is preempted” by the FAA and agreed with plaintiffs that there was a risk of irreparable harm if AB 51 were to go into effect even briefly, because employment agreements would be disrupted if AB 51 is eventually deemed preempted, “particularly given the criminal penalties to which violators of the law may be exposed.”[17] The court will hear the motion for preliminary injunction on January 10, 2020.

We will continue to monitor the lawsuit and will report on further developments.